PricewaterhouseCoopers is paying $25 million to settle charges that it failed to report an infraction by a client. While they might not be too worried about the amount, the hit to its banking practice’s reputation is a blow.
Here’s the story from The Washington Post by Danielle Douglas:
The New York Department of Financial Service on Monday hit PricewaterhouseCoopers, one of the biggest names in financial consulting, with a $25 million fine and two-year suspension for watering down a report on the money laundering failures at the Bank of Tokyo Mitsubishi UFJ.
The settlement with the company is part of a broader investigation into the consulting industry’s relationship with Wall Street. Consultants are supposed to work at the behest of regulators to provide objective assessments of a firm’s problems. But lawmakers and regulators have raised doubts about the independence of consultants handpicked by financial firms accused of wrongdoing.
“We are continuing to find examples of improper influence and misconduct in the bank consulting industry,” said Benjamin M. Lawsky, who heads the New York department. “When bank executives pressure a consultant to whitewash a supposedly ‘objective’ report to regulators – and the consultant goes along with it – that can strike at the very heart of our system of prudential oversight.”
Writing for The New York Times, Ben Protess had these details about what PwC did wrong:
The firm, which eventually submitted a report to regulators detailing the illicit transactions, claimed its work was objective and impartial.
But in the settlement, Mr. Lawsky accused the firm of “improperly altering” the report.
In an initial draft of the report, PricewaterhouseCoopers included paragraphs from a bank manual outlining “special instructions” employees should follow to ensure that transactions with Iran and other countries sanctioned by the United States did not draw attention. But under pressure from the bank, the consulting firm deleted those paragraphs in the version of the report sent to regulators.
The firm also deleted – or watered down – a number of other important issues.
Initially, the report said that had the firm known about “these special instructions” at the start of the review, “then we would have used a different approach for completing this project.”
But in the version sent to regulators, PricewaterhouseCoopers did an about-face. “Our methodology to process and search” transactions “was appropriate,” it said. “We have concluded that the written instructions would not have impacted the completeness of data available” for the review, a conclusion that PricewaterhouseCoopers originally attributed to the bank.
Kevin McCoy reported for USA Today that PwC defended itself, saying that the case was only about one incident:
Miles Everson, PwC’s U.S. advisory leader, said the case stems from “a single engagement completed more than six years ago in which PwC searched for and identified relevant transactions that were self-reported to regulators by PwC’s client. PwC’s detailed report also disclosed the relevant facts that PwC learned subsequent to its search process.”
“PwC is proud of its long history of contributing to the safety and soundness of the financial system by serving as subject matter experts in banking regulatory and compliance matters and the firm is committed to improving continuously and meeting changes in regulatory expectations,” said Everson. “This resolution reinforces that commitment.”
The settlement focuses on PwC’s oversight of the Japanese bank’s operating procedures amid regulators’ suspicions that bank employees had secretly routed billions of dollars through New York-based accounts to nations blacklisted by the U.S.
The bank voluntarily hired PwC in 2007 to document the extent of the improper payments channeled to Iran, Sudan, and Myanmar, nations hit with U.S. financial sanctions because their alleged involvement with terrorism or human rights abuses posed a possible national security threat.
Bloomberg View’s Matt Levine said in his opinion piece that some of the conflict could be solved if regulators did the investigations themselves:
That conflict — you want to play up your contrition, while playing down your culpability — has nothing to do with whether you hire a consultant to do your begging and confessing for you. I mean, hiring (and paying for!) an outside firm to castigate you conveys a pleasing (to regulators) desire to be castigated, so it’s a good idea. But you want the consultant to do what you’d do: make you look contrite, but not guiltier than necessary. Always in a way that is consistent with “the objectivity and integrity expected of consultants.”6
This is not a conflict that can be solved by yelling at — or fining — consultants. The consultants are a distraction; the conflict is between regulators and wrongdoers. Regulators want maximal investigations (“tell us every bad thing you ever did”), while wrongdoers want minimal investigations (“here is every bad thing we ever did [that you know about]”). It’s hard to imagine how that conflict could ever go away.
On the other hand it’s easy to imagine how to minimize its effect. Just have the regulators do the investigation. You want someone to scrutinize every transaction? Scrutinize every transaction! If you outsource your investigation to the company you’re investigating, or its agents, you can’t act surprised when their scrutiny is less than thorough.
This is an excellent point, but it will take a lot more funding, infrastructure and technology to make that happen. It’s great to argue that cutting consultants out of the picture would help solve issues of conflict, but sometimes regulators do need the help. But the big issue is what will happen to PwC’s banking practice. It’s hard to see how it can win business after admitting it bowed to pressure from a client.
